Differences of opinion on decentralization regulations erupt among financial sectors at SEC meeting

The SEC Investor Advisory Committee meeting sparked a debate between traditional financial regulators and the crypto community over decentralization regulation. Commissioner Caroline A. Crenshaw raised questions about whether tokenized equity products and blockchain-based assets require different regulatory treatment.

During the meeting, the Secretary mentioned challenges related to tokenized equity products. The official said that tokenization raises major questions about how tokenized securities are issued, traded, cleared and settled. Changing established regulatory standards to accommodate these processes could pose risks to the integrity of the market and to investors.

Questions raised regarding wrapped security structures

Tokenized stocks are commonly sold as “wrapped securities” that provide exposure to the underlying asset. Some products claim to expand access to assets such as shares in private companies that are not normally accessible to individual investors. However, the Secretary said these tokenized products are significantly different from the underlying assets that are purportedly tracked.

Ownership and rights remain distinct, often unclear, and may be completely separate from the issuer of the underlying asset. These products are typically less liquid than traditional securities and present significant pricing and trading challenges.

Commissioner asks how investors can assess risk

Commissioners questioned how investors and advisors could fairly assess the risks of wrapped tokenized securities. The official asked whether regulatory requirements should be relaxed just because a product exists on a blockchain. The remarks questioned whether wrapped tokenized securities offer investors clear benefits that justify the increased risk.

The most pressing question was what the tokenization of shares in the secondary market actually aims to achieve. Suppose your objectives include improving payment efficiency. This presents a different use case than allowing trading of tokenized stocks without front-end investor protection. The latter scenario could create an environment of regulatory arbitrage at the expense of traditional stock markets.

He stressed that unless the new ecosystem provides common transparency to the market on pricing and tangible customer protections, targets and expected outcomes will remain unclear. These questions illustrate the gulf between traditional financial regulators focused on investor protection and crypto advocates who promote decentralized systems with less oversight.

The meeting comes as the corporate governance landscape at the SEC has changed over the past year. The staff withdrew guidance to make it easier to exclude shareholder proposals, decided not to consider most no-action requests, and issued a policy statement impacting shareholder litigation rights.

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